Perspectives

Historic stimulus for fighting corona crisis

EcoPerspectives // 2nd quarter 2020  
10  
economic-research.bnpparibas.com  
Germany  
Historic stimulus for fighting corona crisis  
The German economy has come to a standstill because of the almost complete lockdown. To fight the economic consequences, the  
government launched a massive stimulus plan to increase spending in the health sector, protect jobs and support businesses.  
Nevertheless, production losses may reach dimensions that are well beyond growth falls in previous recessions. In the worst  
scenario of a three-month lockdown, GDP growth could lose around 20 percentage points and 6 million people may have to join the  
short-time work scheme.  
Completed on 7 April 2020 Forecasts: last update on 9 April 2020  
Coronavirus derails economy  
1
- GDP Growth and inflation  
(
Y/Y, %)  
In March, the German economy came virtually to a halt because of  
an almost complete lockdown. The measures are meant in the first  
place to stem the rapid expansion of the coronavirus and avoid  
overloading the health system. However, they will have a massive  
economic impact.  
GDP Growth  
Inflation  
Forecast  
Forecast  
8
6
4
2
0
2
4
6
8
6
.7  
Some sectors have completely shut down such as education, non-  
essential retail outlets, hotels, restaurants and the tourism industry.  
In some services sector, activity could be maintained, albeit at a  
much slower pace, thanks to teleworking. In the manufacturing  
sector, production had often to be halted because the breaking  
down of supply chains. Production in the car industry was halted not  
only because of supply disruptions or staff shortages, but also  
because of collapsing demand.  
1.9  
1
.5  
1.4  
1.4  
0.6  
0.5  
-
-
-
-
-
6.4  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
Source: BNP Paribas Global Markets  
The March surveys indicate a sharp deterioration of the business  
climate. The Ifo climate index, a reliable business sentiment  
indicator, collapsed by 10 points the steepest fall ever recorded  
since German reunification. Other indicators available within a  
particular short time delay also show a sharp decline in demand. At  
Frankfurt Airport, in the week of 16-22 March, passenger numbers  
slumped by almost 75% from a year earlier, whereas cargo volume  
dropped by about one fifth. The German economy is in shock.  
2
- Deterioration in the business climate in March  
2015=100  
1
15  
Climate  
Situation  
Expectations  
110  
105  
100  
95  
90  
85  
80  
75  
70  
Quick and strong action to protect the economy  
In March, the German government launched an aid package of  
historic proportions. The main aim is to protect jobs and income.  
The package has three pillars. The first pillar is dedicated to protect  
the health care sector. EUR 3.5 billion are made available for  
emergency measures, such as buying protective suits and masks,  
working on a vaccine. Additionally, EUR 55 bn are made available  
to fight the pandemic.  
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
Source: IFO  
The third and by far the largest pillar of the package is an extensive  
assistance programme to support businesses, partly through the  
expansion of existent schemes  liquidity assistance programmes  
and loan guarantees mainly through the German state development  
bank KfW  or a new programme to support small businesses,  
freelancers and the self-employed. Tax authorities will grant tax  
payments deferrals. Moreover, funds are available at the federal  
and the state (Land) level to buy equity stakes in struggling  
companies.  
The second pillar consists of measures to protect jobs by facilitating  
access to short-time working scheme (Kurzarbeit), under which the  
Federal Employment Agency (FEA) pays 60-67% of the forgone  
wages of workers whose hours are being cut. The scheme was very  
successful in protecting jobs during the great recession in 2008-09.  
During that period, the FEA disbursed about EUR 10 billion, mainly  
to workers in the manufacturing sector. This time the scheme will be  
much widely used in other sectors, such as retail, hotels and  
restaurants. In addition, eligibility requirements to the scheme have  
been loosened. The costs of the measure are hard to predict as  
they depend on the depth and duration of the crisis (see below).  
The budgetary costs are considerable. The Federation will take out  
new loans totaling roughly EUR 156 bn (4.5% of GDP). This does  
not include possible calls on the loan guarantees or participations in  
equity.  
EcoPerspectives // 2nd quarter 2020  
11  
economic-research.bnpparibas.com  
Germany supports the efforts on the European level. It welcomes  
the plan to establish a EUR 25 bn Coronavirus Response  
Investment Initiative. It also has opened its hospitals for corona  
victims from other EU countries. However, the government remains  
opposed to the pooling of European debt, which would have helped  
lending to the southern European countries that are most hit by the  
coronavirus.  
3
- High hospital bed capacity in Gemany  
Acute care hospital beds per 1000 people  
8
7
6
5
4
3
2
1
0
Outlook depends on length and depth of the crisis  
The effect of the corona crisis is much more severe than anything  
that the Federal Republic has experienced in its history. The output  
losses will depend on the duration of the lockdown period, the fall in  
activity during that time, and the subsequent recovery period. To  
gain some insight in the possible magnitude, the Ifo institute has  
developed three scenarios  low, high, and a medium scenario  
based on business expectations in the March Ifo survey  combined  
GBR ESP ITA NLD FRA POL BEL AUT DEU KOR JAP  
Source: OECD  
These budgetary costs do not include losses on state-guaranteed  
loans and the contribution to the European emergency package. It is  
likely that the German government accounts remain in deficit for a  
considerable period.  
1
with different lockdown durations and recovery periods. These  
calculations assume that the lockdown period will last between one  
month in the mildest scenario to three months in the most severe  
one. In all scenarios, activity could return in 2021 to the same as  
level as before the crisis.  
In the mildest scenario - 40% GDP loss in the lockdown month and  
one month post-lockdown recovery period the annual GDP growth  
rate could decline by around 5%. In the most severe scenario, the  
GDP loss in the lockdown month amounts to 48.7% and the loss in  
the annual growth rate could be 6.1%. If the lockdown period lasts  
for 2 months and the recovery period 3 months, the decline in the  
annual GDP growth rate amount to 12% and 14% in the low and  
high scenario, respectively. In the worst case scenario, a three-  
month lockdown followed by a four-month recovery period, the  
losses could amount to around 20% of GDP.  
In all scenarios, the total number of short-time workers rises to  
levels that exceed the 1.5 million part-time workers during the 2008-  
0
2
9 financial crisis significantly. In the case of a one-month lockdown,  
.1 million to 3.9 million can be expected according to the Ifo  
calculations. If the lockdown continues for two or three months, the  
number should increase to 3.4 to 5.5 million and 4.2 million to  
6
.6 million, respectively.  
The state budget is likely to be heavily impacted. From a  
stabilisation point of view, this is a desirable effect. A study on the  
impact of the tax and transfer systems in the European Union and  
the US in the 2008-09 economic crisis found that the automatic  
stabilisers absorb 48% of an income shock in Germany, compared  
2
with 38% in the EU and 32% in the US. The Ifo scenarios show that,  
depending on the length of the lockdown period and the severity of  
the activity fall, the burden on the state budget could be between  
EUR 50 bn or 1.4% of GDP (low scenario, 1 month lockdown) to  
EUR 200 bn or 5.7% of GDP (high scenario, 3 month lockdown).  
1
Ifo (2020), Shutdown für Deutschland: Eine Szenarienrechnung, ifo  
Schnelldienst, 2020, 73, Nr. 04.  
2
Dolls, M., Fuest, C., & Peichl, A. (2012). Automatic stabilizers and  
economic crisis: US vs. Europe. Journal of Public Economics, 96(3-4), 279-  
294.  
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